Trading is not like business!

[Cache Landing]

Wow, I'm impressed by many peoples' ability to selectively pick out parts of what they assume is the point that I was making and then criticize without at all considering the overall scope of the argument.

It's ok, my wife accuses me of selective hearing sometimes too. But I do get a chuckle out of someone trying to disprove a point that I wasn't even trying to make.

I'm not saying that the markets aren't a business. The point is not that someone can't make a business of trading. The argument is completely different.

Going back to the casino example.... all those degenerates that mistakenly believe that they can beat the house. Are they running a business? Of course not. Likewise, I'm not saying the casino isn't a business, I'm saying that no amount of business acumen is going to make the gamblers at the casino long-term profitable. Similarly, a trader without an edge is not running a business.

It's all fine and good to tell the struggling trader to run his trading like a business, but what does that mean? He's not manufacturing anything, so the conventional wisdom there is useless. He isn't providing a service that someone else is paying him for, so no amount of advertising or increased customer service is going to help him.

He comes on here having struggled to even make a profit for months or years and the advice he gets is, "treat your trading like a business". That is completely worthless advice. Conventional business and trading for a living are much too dissimilar.

 

[Cache Landing]

Quote from itsame:
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Your rebuttal was so far off base you really should consider the opposing points before you start.

You claim that a trader can advertise for additional capital. Not the traders we are talking about here. We're talking about those who are struggling to even make it into the black. Yeah, they should go looking for OPM, that'll make them successful.

Your landscaping example is not at all comparable to becoming a successful trader. They aren't even on the same planet in terms of difficulty. The idea is laughable.

It's great that you accuse me of sherry picking examples and then you refer to examples that are obviously outside the norm in the world of entrepreneurship. >99% of startup ventures are in an industry that is familiar to the entrepreneur. And in any case, your argument simply proves my point. You're claiming that a person can enter an industry that is completely foreign to him and still have a reasonable chance at success. There aren't many people on this forum that will claim the same of someone who knows nothing about trading and is just learning as they go.

Your "fake business" argument is a "fake" argument. You are arguing against a point that I never made. My point in that argument was quite similar to your point. That it takes a disproportionately large amount of capital to trade for a living as compared to the vast majority to conventional small business. You tell me what a reasonably realistic annual return would be for even an experienced trader. Then go ahead and do the math to figure out how much capital is needed just to make a living. I didn't arbitrarily pick $15K. The traders I'm referring to are generally not trading more than that. Most of them are lucky to scrape together $10K.

Again, consider the scope of the argument before you rebut. The entire point was based around the new trader who is under capitalized and looking for encouragement on what to do differently.

 

[Specterx]

Quote from Cache Landing:

It's all fine and good to tell the struggling trader to run his trading like a business, but what does that mean? He's not manufacturing anything, so the conventional wisdom there is useless. He isn't providing a service that someone else is paying him for, so no amount of advertising or increased customer service is going to help him.

He comes on here having struggled to even make a profit for months or years and the advice he gets is, "treat your trading like a business". That is completely worthless advice. Conventional business and trading for a living are much too dissimilar.

To me, "treat your trading like a business" means to take it seriously. Have a plan, understand what it is you're trying to do, control costs and risks, be properly capitalized or have a plan to raise capital. There's no implication that having an MBA or trying to follow conventional business practices will improve your odds of success. Such things as sales, marketing, product design etc. are obviously irrelevant to trading.

Examples of folks NOT treating trading like a business are everywhere. I know at least two people who've lost respectively 400k and 800k trying to day-trade the markets - an entire life's savings. I still remember an article from 2008 or thereabouts which quoted an elderly retiree, stating that he'd started watching CNBC for stock-picking and trading advice to help boost his portfolio. Almost everyone just starting out assumes that trading is easy, requires little in the way of time or skill, lets you take a $10k account to $1 mil with 500% returns out of the gate, and so on. If you talked to the same people about "starting a business," they would readily agree that such assumptions are unrealistic. In that respect, there's little difference between trading and other lines of business.

Obviously any one-liner bit of advice is going to be extremely vague and general, but it indicates the direction one needs to go - and apparently, for a lot of people, the things I mentioned previously just aren't that self-evident.

 

[Butterball]

Quote from Cache Landing:Traders don't do this. They try to develop a new skill set after starting. It's backwards.

That's your assumption though. What makes you think all traders are forced to conform their own skillset to one certain trading approach? Why don't traders have a choice of choosing a trading approach that best matches their skill-set and personal circumstances?

Some start-up traders would make better FX day traders while others would make better long-term deep value investors.

The turtles were chosen based on their ability to trade and follow a mechanical momentum and breakout system. Just like you'd choose a bunch of start-up restaurateurs on their passion for food or talent for cooking in order to increase their likelihood of success.

 

[LeeD]

Quote from Cache Landing:

And it doesn't matter how much efficiency is created, the traders aren't adding value to the product.

Nor do most salespeople. However, retail margins make up 40% - 60% of a product price in a shop or even on the internet.

So, what you would be saying is the added value in entering the price in a cash machine and counting the cash (or packaging the product and attaching a label) is ordinarily higher than the vlaue of the whole product.

 

[LeeD]

Quote from Cache Landing:

3---In normal entrepreneurship, the successful business owner creates an entity that operates within his current skill set. This skill set was developed prior to starting the new venture. Traders take the opposite approach. They begin trading and hope to develop the necessary skills before their lack of appropriate skill puts them out of business. Imagine the recent high school grad who decides that he'll immediately get into business consulting. Rather than go to school to learn business, he sticks an ad in the paper and says, "after enough companies have contracted my services, I'll figure out what works and what doesn't". This is obviously a recipe for failure.

I can't disagree more strongly.

In self-employment, yes, skill matters. A typical path is a person works for a while as an employee, gains a few skills. Then the former employers may hire him or her as a consultant (that is higher-paid... but temporary worker unless you are a medical doctor). Then the persons would get repeat bisiness and offer some services by recomendation etc.

However, modern business is about sales, not about trade skills.

Most businesses that get to grow start with the founders identifying a need in the market which is not provided for or an area with unusually high margins. The only skills that are needed is being good with people and with money. For anything else the "businessmen" are better off hiring someone with the required skill.

Suppose you are an experienced plumber. If you move to a small town and hold yourslef out as a plumber you'll make yourslef known to the residenst and if the town doesn't have a plumber of the other plumber happened to live in a disadvantageous location, you'll get some business.

However, most people live in cities these days and they use Web search, newspaper ads or local yellow pages. Most don't build personal relationship with a plumber and electrician and every tradesman they may ever need.

So, a business needs a solid advertisement budget. It also need high availability. What do you do if you are having a leak and the plumber you called is busy or on holiday? You call a different plumber and never call the first plumber again. Similarly, large companies like utilities (providers of water and electricity) wouldn't evenm deal with an individual because a single plumber can go on holiday, have an accident... and large companies like dealing with other large companies.

So, as a result a successful plumbing business is a guy in a suit without any plumbing experience and a few qualified plumbers working as employees.

Quote from Cache Landing:

4---Related to #3 is the idea that a successful entrepreneur most often developed a skill set in the industry that plays to his natural talents. This is in sharp contrast to most prospective traders. The latter don't really have any idea what talents are required to be a successful trader, so again they find themselves in a backward process, hoping to first identify the necessary talents and then hoping that they currently possess the same.

Same goes for most small business start-ups. People want to run a local shop or a cafe. They don't think any special skill is required. Say, a cafe owner needs to learn how to make coffee using an expresso machine. This is similar to how a trader needs to learn to enter orders and read the P&L statement. Neither skill has anything to do with the success of the business.

Quote from Cache Landing:

5---As a continuation of the above, many skills are easy to come by without much natural ability. These can be learned through some light practice and study. The result is often a business that returns $30-100K annual income. The training for these usually comes from vocational schools. They will often operate from home, much like the trader, but in comparison, a $15K investment will likely be recouped during the first several months, and they can expect annual income near the national median during the first couple years. Trading does not fall into this category. The trader who develops a "vocational school equivalent" trading skill set, might expect returns of 10-20% annual. With $15K seed capital it will take around 20 years to reach the median income, and that is assuming that there are no withdrawals. The conclusion here is that the required skill set to produce the results necessary to make a living, are the industry equivalent of top tier surgeons. I would say that the number of people at this level is probably similar to the number of those surgeons too.

That's the difference between a business and a trade I highlighted above.

A tradesman, such as a plumber or an electrician would usually be an employee. Yes, they will get handsome return on the training fees but that's becasue what they are goping to do is not a business.

Now if you think of plumbing as a business. you need to rent an office, get a phone number with call queue, potentially hire a secretary, get a few actual plumbers interested. So, you are looking at a substantial upfront cost.

 

[jinxu]

Cache Landing,

I'm just wondering if my comment about the 50% business failure rate sparked your comments in this thread. IMO, trading is a lot like the R&D side of business. First you invest some time and money to do research and experiment. It can take months to years before you can get a final product which is your system. Then and only then will you start to make money.

 

[Cache Landing]

Quote from jinxu:

Cache Landing,

I'm just wondering if my comment about the 50% business failure rate sparked your comments in this thread. IMO, trading is a lot like the R&D side of business. First you invest some time and money to do research and experiment. It can take months to years before you can get a final product which is your system. Then and only then will you start to make money.

It wasn't your comments in particular, but comments on that thread in addition to others. Seems like nobody wants to be realistic that it really does take a certain type of person to become a career trader. Certain skills can be learned obviously, but many cannot. And as much as people want to keep their dream alive, the vast majority of them will never be a trading success without a real trader holding their hand through it for their entire career. I don't consider that successful.

 

[Cache Landing]

Quote from Specterx:

To me, "treat your trading like a business" means to take it seriously. Have a plan, understand what it is you're trying to do, control costs and risks, be properly capitalized or have a plan to raise capital. There's no implication that having an MBA or trying to follow conventional business practices will improve your odds of success. Such things as sales, marketing, product design etc. are obviously irrelevant to trading.

Examples of folks NOT treating trading like a business are everywhere. I know at least two people who've lost respectively 400k and 800k trying to day-trade the markets - an entire life's savings. I still remember an article from 2008 or thereabouts which quoted an elderly retiree, stating that he'd started watching CNBC for stock-picking and trading advice to help boost his portfolio. Almost everyone just starting out assumes that trading is easy, requires little in the way of time or skill, lets you take a $10k account to $1 mil with 500% returns out of the gate, and so on. If you talked to the same people about "starting a business," they would readily agree that such assumptions are unrealistic. In that respect, there's little difference between trading and other lines of business.

Obviously any one-liner bit of advice is going to be extremely vague and general, but it indicates the direction one needs to go - and apparently, for a lot of people, the things I mentioned previously just aren't that self-evident.

I agree completely, but those asking the advice aren't necessarily seeing it that way. If I were to tell a prospective trader to write a business plan for his trading I would probably get a pretty good chuckle from of the result. In reality, when you first start out in trading, your business plan is a lot more about how not to blow up your account. It's all about stress tests and contingencies. A conventional business plan has large sections devoted to revenue creation. Good luck to the new trader in detailing revenue creating activities.

What I'm also saying is that small start-ups regularly realize >100% return on initial capital during the early years. I'm not talking about $1MM ventures, but you average Schmoe starting a small 1-5 man operation. The advantage that trading has is the ability to grow it without limit. IF the trader is successful, 20 years down the road he'll be making 5-20X what would've been possible through conventional business. But with this possibility comes the FACT that successful career trading is much more difficult.

 

[Cache Landing]

Quote from LeeD:

Nor do most salespeople. However, retail margins make up 40% - 60% of a product price in a shop or even on the internet.

So, what you would be saying is the added value in entering the price in a cash machine and counting the cash (or packaging the product and attaching a label) is ordinarily higher than the vlaue of the whole product.

Yes, and in business terms we are saying that the service is "non-value added". As a regular course of business most companies seek to eliminate as much non-value added process as possible. You mention retailers operating on 100% non-value added concepts. That is absolutely true.

Imagine now that a retailer didn't get to charge a markup after purchasing from a wholesaler. What if that retailer's business plan was to buy at retail prices and then wait for the market value of the product to increase. IOW, pure inventory turnover. No markups.

That is the arena that new traders operate in. They have zero ability to increase the price of the product they are buying before reselling it. They are simply speculating that at some future point the market will attach a higher value to it. Conversely, retailers are in the business of creating the largest profit margin possible. They aren't concerned much with price appreciation over time. They are mainly concerned with getting the product as cheap as possible and then marking it up as high as possible. Much different than appreciation.